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Creating a budget and managing cash flow

Key takeaways

  • For the self-employed, creating a budget and proactively managing your cash flow can help you navigate income fluctuations.  
  • To help manage cash flow, consider all expenses in planning, establish clear payment terms, and set aside an emergency savings. 
When you’re self-employed, a good budget for your business can help keep you on track to meet your business goals, allowing you to figure out how many projects you should be aiming for or if you need to increase your marketing to attract more clients. A business budget can also help you better manage your cash flow during leaner times. 

How to create a business budget when you’re self-employed

To create your budget, project your expected revenue and expenses for at least 1 year. Consider how variable expenses or seasonal business changes will impact your profitability over time. If you do a lot of business during the holidays, for example, be sure your plan includes saving some of that income to cover expenses in slow months. 
Adjust your planned revenue and expenses until your budget is balanced. Your final budget should reflect your projection for a profitable business. To make it a reality, create action plans around your budget where needed. Want to sell more during the summer? Arrange to order more supplies at the right time to keep things on track. 
Your budget can continue to be a useful decision-making tool if you keep it up to date. Each month, check to see if you’re on track. Likely, reality will be different from your plan, so adjust your budget throughout the year as your situation evolves. 

Budgeting your business for lean vs. cash-rich months

When working for yourself, you’ll have lean months, but you may also have months when you’ll make a lot of money. You can break down your budget into 2 types to help prepare for these ups and downs. 
1. The lean budget – This budget covers your barebone expenses. To go this route, you’ll need to figure out how much money you’ll need to scrape by when you’re experiencing a work lull. What are the payments you absolutely must make each month? Leave out anything that you’d consider a “want” rather than a “need.” 
2. The cash-rich budget – A cash-rich budget has a bit more padding—you can probably take your team out for a nice work dinner or pay yourself a bit extra to put toward your personal goals. In this budget, you can add in a few of those wants. However, keep in mind that you may want to use some of this extra cash flow to invest in growing your business, expanding your expertise, or adding to your business savings to cover the next lean month. 
Fidelity’s budget checkup tool can help you bucket personal expenses and determine monthly surplus or deficit.  

Tips for managing your business’s cash flow

You have a budget. Great! Does that mean there’s always cash in the bank? Not necessarily. 
In the self-employed world, money may not arrive when you expect. When you’re used to having a full-time job where cash is deposited into your bank account like clockwork, it can take some getting used to—and some savings to tide you over. 
Understanding and proactively managing your cash flow will help you to navigate income fluctuations—setting aside extra money during busy times to account for future periods of less work. Cash flow statements and forecasts assess income vs. expenses each month, allowing you to understand your financial position and anticipate any shortfalls. 
Here are some tips to help you manage your cash flow: 
  • Regularly assess cash flow statements and forecasts – Build cash flow projections as a part of your overall budgeting process to visualize how your money comes and goes. Several software tools can help with broader analysis, or you can build a simple model in Excel. 
  • Consider all expenses in planning – Unexpected expenses can complicate your planning. Make sure you clearly define and consider all your expenses, including fixed and variable expenses. 
  • Establish clear payment terms – Large payment windows can create cash flow gaps, particularly if clients pay late. Send invoices early, and establish clear payment terms and dates, with penalties for late payments. Where possible, push for incremental payments based on project milestones to smooth cash flow. 
  • Set aside an emergency savings – Establishing an emergency savings to act as a buffer during slower times is vital. Continue to pay into it regularly—think about saving 5% of take-home pay. Remember, freelancers and small business owners need enough funding to cover personal and business expenses in case of an emergency. 
To help estimate your cash flows, try the Small Business Administration’s planning tool, which includes a template to capture inflows and outflows.  

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This information is general in nature and provided for educational purposes only.

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